UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _______.
Commission File No. 0-13576
ENCORE COMPUTER CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-2789167
(State of Incorporation) (I.R.S. Employer Identification No.)
6901 West Sunrise Blvd.
Fort Lauderdale, Florida 33313
(Address of Principal Executive Offices) (Zip Code)
Telephone: 954-587-2900
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. X Yes No
The number of shares outstanding of the registrant's
only class of Common Stock as of May 13, 1997 was
37,324,618.
Encore Computer Corporation
Index
Page
Part I FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements 3
Notes to Condensed Consolidated
Financial Statements 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Part II OTHER INFORMATION 18
Signature Page 19
ENCORE COMPUTER CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands except per share data)
Three Months Ended
March 30, March 31,
1997 1996
Net sales:
Equipment $4,183 $6,571
Service 4,150 5,143
Total 8,333 11,714
Costs and expenses:
Cost of equipment sales 7,176 5,879
Cost of service sales 4,269 4,961
Research and development 7,269 8,264
Sales, general and administrative 7,638 8,718
Total 26,352 27,822
Operating loss -18,019 -16,108
Interest expense, principally
related parties -1,399 -690
Interest income 29 41
Other income/(expense), net -663 -140
Loss before income taxes -20,052 -16,897
Provision for income taxes -29 0
Net loss -$20,023 -$16,897
Net loss per common share:
Net loss attributable to common
shareholders ($26,883) ($22,851)
Loss per common share ($0.60) ($0.52)
Weighted average shares
of common stock 44,640 43,714
The accompanying notes are an integral part of the condensed
consolidated financial statements.
ENCORE COMPUTER CORPORATION
Condensed Consolidated Balance Sheets
(in thousands except share data)
(Unaudited)
March 30, Dec 31,
1997 1996
ASSETS
Current assets:
Cash and cash equivalents $5,006 $3,936
Accounts receivable, less allowance 10,238 14,970
Inventories (Note B) 12,100 13,896
Prepaid expenses and other current assets 790 1,409
Total current assets 28,134 34,211
Property and equipment, net 32,179 33,376
Other assets 1,553 1,669
Total assets $61,866 $69,256
LIABILITIES AND CAPITAL DEFICIENCY
Current liabilities:
Curr. portion long term debt-rela parties(Note D) $43,516 $72,659
Current portion long term debt-other (Note D) 167 182
Accounts payable and accrued liabilities (Note C) 30,651 28,665
Total current liabilities 74,334 101,506
Long term debt-other (Note D) 445 476
Other liabilities 1,255 1,284
Total liabilities 76,034 103,266
Capital deficiency:
Preferred stock, $.01 par value; authorized 10,000,000 shares:
Series A Convertible Participating Preferred, issued
73,641 shares in 1997 and 1996 1 1
6% Cumulative Series B Convertible Preferred, issued
728,722 in 1997 and 1996, with an aggregate
liquidation preference of $72,872,200 7 7
6% Cumulative Series D Convertible Preferred, issued
1,115,074 in 1997 and 1996, with an aggregate
liquidation preference of $111,507,400 11 11
6% Cumulative Series E Convertible Preferred, issued
1,139,782 in 1997 and 1996, with an aggregate
liquidation preference of $113,978,200 11 11
6% Cumulative Series F Convertible Preferred, issued
533,333 in 1997 and 1996, with an aggregate
liquidation preference of $53,333,300 5 5
6% Cumulative Series G Convertible Preferred, issued
572,289 in 1997 and 1996, with an aggregate
liquidation preference of $57,228,900 6 6
6% Cumulative Series H Convertible Preferred, issued
350,000 in 1997 and 1996, with an aggregate
liquidation preference of $35,000,000. 4 4
6% Cumulative Series I Convertible Preferred, issued
400,000 in 1997 with an aggregate
liquidation preferenceof $40,000,000. 4 0
Common stock, $.01 par value; authorized 200,000,000 shares;
issued 37,298,306 and 37,270,457 in 1997 and 1996,
respectively. 373 373
Additional paid-in capital 486,929 447,068
Accumulated deficit -501,519 -481,496
Total capital deficiency -14,168 -34,010
Total liab and cap'l deficiency $61,866 $69,256
The accompanying notes are an integral part of the condensed
consolidated financial statements.
ENCORE COMPUTER CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Three Months Ended
March 30, March 31,
1997 1996
Cash flows from operating activities:
Net loss ($20,023) ($16,897)
Adjustments to arrive at net cash used in operating activities:
Depreciation and amortization 2,043 2,899
Net changes in operating assets and liabilities:
Accounts receivable 4,732 -372
Inventories 1,796 -6,284
Prepaid expenses and other current assets 619 -305
Other assets -5 167
Accounts payable and accrued liabilities 1,823 6,363
Other liabilities -29 73
Net cash used in operating activities -9,044 -14,356
Cash flows from investing activities:
Additions to property and equipment -725 -1,877
Cash flows from financing activities:
Net borrowings under revolving loan agreements 10,857 14,846
Principal payments of long term debt -46 -42
Issuance of Common Stock 28 483
Net cash provided by financing activities 10,839 15,287
Increase (decrease) in cash and cash equivalents 1,070 -946
Cash and cash equivalents, beginning 3,936 2,797
Cash and cash equivalents, ending $5,006 $1,851
The accompanying notes are an integral part of the condensed
consolidated financial statements.
ENCORE COMPUTER CORPORATION
Condensed Consolidated Statements of Cash Flows
Three Months Ended
March 30, March 31,
1997 1996
Supplemental disclosure of cash flow information (in thousands):
Cash paid during the period for interest $29 $105
Cash paid during the period for income taxes 485 0
Non-cash investing and financing activity:
Indebtedness exchanged for preferred stock $40,000 $0
The accompanying notes are an integral part of the condensed
consolidated financial statements.
ENCORE COMPUTER CORPORATION
Condensed Statements of Shareholders' Equity (Capital Deficiency)
(in thousands except share data)
Preferred Stock
Series A Series B Series D Series E
Par Par Par Par
Shares Val Shares Val Shares Val Shares Val
Balance
Dec 31, 1996 73,641 $1 728,722 $7 1,115,074 $11 1,139,782 $11
Common stock options
exercised, $.69 to
$1.56 per share
Issuance of Series I
Convert. Preferred
Stock (Notes D and E)
Net loss
Balance
Mar 30, 1997 73,641 $1 728,722 $7 1,115,074 $11 1,139,782 $11
The accompanying notes are an intergral part of the condensed
consolidated financial statements.
Preferred Stock
Series F Series G Series H Series I
Par Par Par Par
Shares Val Shares Val Shares Val Shares Val
Balance
Dec 31, 1996 533,333 $5 572,289 $6 350,000 $4 0 $0
Common stock options
exercised, $.69 to
$1.56 per share
Issuance of Series I
Convert. Preferred
Stock (Notes D and E) 400,000 4
Net loss
Balance
Mar 30, 1997 533,333 $5 572,289 $6 350,000 $4 400,000 $4
Common Stock Shrhldrs'
Addt'l Equity
Par Paid-in Accum (Capital
Shares Val Capital Deficit Deficiency)
Balance
Dec 31, 1996 37,270,457 $373 $447,068 ($481,496) ($34,010)
Common stock options
exercised, $.69
to $2.00/shar 27,849 0 28 0 28
Issuance of Series I
Convertible Preferred Stock
(Notes D and E) 39,833 0 39,837
Net loss (20,023) (20,023)
Balance
Mar 30, 1997 37,298,306 $373 $486,929 ($501,519) ($14,168)
Encore Computer Corporation
Notes to Condensed Consolidated Financial Statements
A. Summary of Significant Accounting Policies
Basis of Presentation and Other Matters
The accompanying condensed consolidated financial statements
are unaudited and have been prepared by Encore Computer
Corporation ("Encore" or the "Company") in accordance with
generally accepted accounting principles. Certain
information and footnote disclosures normally included in
the Company's annual consolidated financial statements have
been condensed or omitted. It is suggested that these
condensed consolidated financial statements be read in
conjunction with the audited consolidated financial
statements for the year ended December 31, 1996.
The condensed consolidated financial statements, in the
opinion of the Company, reflect all adjustments (including
normal recurring accruals) necessary for a fair statement of
the results for the interim periods. All adjustments made
during the interim periods are normal recurring adjustments.
The year-end condensed balance sheet data is derived from
audited financial statements but does not include all
disclosures required by generally accepted accounting
principles. Certain reclassifications have been made to
conform prior period data to current period presentation.
The results of operations for the interim periods are not
necessarily indicative of the results of operations for the
fiscal years.
The accompanying condensed consolidated financial statements
have been prepared assuming that the Company will continue
as a going concern. As discussed in Note D and E of the
Notes to Condensed Consolidated Financial Statements, the
Company has borrowings under a $55,000,000 facility which
matures June 30, 1997. Additionally, the Company does not
have a committed source of financing to meet expected
requirements over the next year. These matters raise
substantial doubt about the Company's ability to continue as
a going concern. The consolidated financial statements do
not include any adjustments that might result from the
outcome of these uncertainties.
Per Share Data
Per share data is calculated based upon the weighted average
number of shares of common stock and common stock
equivalents outstanding. In fiscal periods which report net
losses, the calculation does not include the effect of
common stock equivalents such as stock options since the
effect on the amounts reported would be antidilutive.
Series A Convertible Participating Preferred Stock ("Series
A") has been considered common stock (on an assumed
converted basis) for purposes of all income (loss) per share
calculations. All other series of preferred stock have been
determined to be common stock equivalents but are not
included in the weighted average number of shares of common
stock and equivalents or in the calculation of net loss per
share for the periods presented because the effect would be
antidilutive.
Net loss per common share was determined by dividing the net
loss, as adjusted, by applicable shares outstanding. The
loss was adjusted by the aggregate amount of dividends on
the Company's preferred stock. Preferred stock dividends
amounted to $6,859,600 and $5,953,500 for the three month
periods ended March 30, 1997 and March 31, 1996,
respectively. Based on the capital deficiency, the Company
is precluded from paying dividends on its preferred stock
outstanding. Accordingly, the Company has accumulated
preferred stock dividends amounting to $20,276,300. All
preferred stock dividends other than those accumulated at
March 30, 1997 have been paid in additional shares of the
appropriate shares of stock.
B. Inventories
Inventories consist of the following (in thousands):
March 30, December 31,
1997 1996
Purchased Parts $ 3,736 $ 9,357
Work in process 5,825 306
Finished goods 2,223 3,981
Loaned computer equipment and
consignment inventory 316 252
$ 12,100 $ 13,896
Storage Product inventory amounted to $6,866,000 and
$9,169,000 at March 30, 1997 and December 31, 1996,
respectively. The Company continues to pursue several
potential OEM's to enhance distribution of the Storage
Product. No estimate can be made of a range of amounts of
loss that are reasonably possible should these efforts not
be successful.
C. Accounts Payable and Accrued Liabilities;
Accounts payable and accrued liabilities consist of
the following (in thousands):
March 30, December 31,
1997 1996
Accounts payable $ 4,916 $ 4,976
Accrued salaries and benefits 4,770 4,034
Accrued interest-related parties 13,096 11,614
Accrued taxes 1,858 2,760
Deferred income, principally
maintenance contracts 1,659 879
Other accrued expenses 4,352 4,402
$ 30,651 $ 28,665
Accrued interest of $12,767,000 and $10,791,000 was payable
to Gould at March 30, 1997 and December 31, 1996,
respectively. The balance of accrued interest to related
parties is being amortized over the term of the credit
agreement.
D. Debt
Debt consists of the following (in thousands):
March 30, December 31,
1997 1996
Debt to unrelated parties:
Mortgages payable $ 612 $ 658
Current portion of debt (167) (182)
Total long term debt to
unrelated parties $ 445 $ 476
Debt to related parties:
Credit Agreement with Gould
Electronics Inc. $ 43,516 $ 72,659
Current portion of debt (43,516) (72,659)
Total long term debt to
related parties $ - $ -
Since 1989, the principal source of financing for the
Company has been provided by the Japan Energy Corporation,
through its wholly owned subsidiaries, Gould Electronics,
Inc. ("Gould") and EFI International ("EFI") (collectively,
the "Japan Energy Group"). The Japan Energy Group is a
related party due to the significant financial interests of
Gould and EFI in the Company. Assuming full conversion of
preferred stock holdings as of March 30, 1997, the Japan
Energy Group beneficially owns 83% of the Company's common
stock. The Company is dependent on the continued financial
support of the Japan Energy Group. Should the Japan Energy
Group withdraw its financial support, the Company may be
unable to continue its normal operations.
On March 19, 1997, Gould as authorized by Japan Energy
Corporation, agreed to cancel $40,000,000 of indebtedness
pursuant to their loan agreement (the "Credit Agreement") in
exchange for the issuance to Gould of 400,000 shares of the
Company's Series I Convertible Preferred Stock ("Series I"),
as discussed in more detail in Note E of Notes to Condensed
Consolidated Financial Statements. The Company and Gould
also agreed to amend the Credit Agreement to (i) reduce the
maximum amount which can be borrowed by the Company from
$80,000,000 to $50,000,000, and (ii) provide that any
borrowings in excess of $41,915,869 (the principal amount
outstanding on March 19, 1997 after giving effect to the
exchange of indebtedness for shares of Series I) may be made
only at the discretion of Gould. On May 12, 1997, Gould
agreed to amend the Credit Agreement to increase the maximum
amount which can be borrowed by the Company from $50,000,000
to $55,000,000. As of May 13, 1997 the Company owed to
Gould $49,641,927 under the Credit Agreement, plus
$13,502,088 in accrued interest. All borrowings under the
Credit Agreement, plus accrued interest, are due and payable
on June 30, 1997. In the event of default, the rate of
interest to be applied will immediately increase by an
additional 2%.
The credit facility bears interest at the prime rate plus 2%
(10.5% at March 30, 1997). As of March 30, 1997, Encore
owed to Gould $43,516,000 in principal, plus $12,767,000 in
accrued interest. Borrowings are collateralized by
substantially all of the Company's tangible and intangible
assets and the agreement contains various covenants
including maintenance of cash flow, leverage and tangible
net worth ratios and limitations on capital expenditures,
dividend payments and additional indebtedness. Gould had
waived compliance with the financial covenants in the
agreement until January 1, 1997 and has indicated it will
not extend the waiver beyond this date.
In connection with the various exchanges of indebtedness for
preferred stock discussed herein, the United States Defense
Investigative Service ("DIS") has reviewed the relationship
between the Company and the Japan Energy Group under revised
government requirements relating to foreign ownership,
control and influence. Given the current requirements in
the National Industrial Security Program Operating Manual
("NISPOM"), DIS has decided to replace the previous method
of negation of Foreign Ownership Control and Influence,
accomplished by Board Resolution, with a more detailed
Security Control Agreement as prescribed by DIS in the
NISPOM, which is currently being drafted by Encore's
counsel.
E. Shareholders' Equity
As discussed in more detail in Note D of Notes to Condensed
Consolidated Financial Statements, on March 19, 1997 Gould
canceled $40,000,000 of indebtedness in exchange for 400,000
newly-issued shares of Series I Convertible Preferred Stock
("Series I"). The principal terms of the Series I are as
follows:
(a) holders of such shares are entitled to receive, when,
as and if declared by the Company's board of directors, an
annual dividend per share equal to $6.00; provided, however,
that if the number of authorized shares of common stock of
Company is not increased to at least 300,000,000 on or prior
to July 15, 1997, then such dividend per share is increased
to $10; and, further provided, that if the number of shares
of authorized common stock of the Company is increased to at
least 300,000,000 at any time after July 15, 1997, then such
dividend per share is decreased from $10 to $6;
(b) dividends on such shares are payable in cash; provided,
however, under certain specified circumstances such
dividends may be paid in additional shares of Series I
Stock;
(c) such shares are entitled to a liquidation preference of
$100 per share plus an amount equal to accrued and unpaid
dividends on such share, which liquidation preference is
senior in priority to the Company's common stock and to all
other shares of Preferred Stock currently outstanding;
(d) subject to certain specified restrictions, such shares
are convertible, at the holder's option, at any time, into
that number of shares of the Company's common stock equal to
(i) the liquidation preference divided by $3.25, which
amount is subject to adjustment under certain specified
circumstances;
(e) such shares are convertible, at the Company's option,
in accordance with the conversion methodology summarized in
paragraph (d) above, if (i) the last sale price of the
Company's common stock exceeded $3.90 for twenty consecutive
trading days and (ii) a buyer is contractually committed to
purchase (x) for at least $3.90 per share, at least 50% of
the shares of common stock into which the outstanding Series
I are then convertible or (y) for at least $3.50 per share,
at least 75% of the shares of common stock into which the
outstanding shares of Series I are then convertible;
(f) such shares are non-voting shares except as to matters
that would adversely affect the Series I Stock and except as
to any other matters which, pursuant to applicable law,
holders of such shares may be entitled to vote; and
(g) to the extent that there are not a sufficient number of
authorized shares of the Company's common stock to allow for
a conversion of Series I into shares of common stock as
described above (after taking into account, among other
things, (x) the number of options, warrants and other
similar rights outstanding and (y) 135% of the maximum
number of shares of common stock the Company may be required
to issue on conversion of all the shares of each series of
preferred stock then outstanding), then, to that extent, the
Series I is convertible into shares of Series J Convertible
Participating Preferred Stock of the Company (the "Series
J") at the rate of one share of Series J for each 100 shares
of common stock.
The principal terms of the Series J are as follows:
(a) holders of such shares are entitled to receive a
dividend per share equal to 100 times the dividend that is
paid by the Company with regard to a share of common stock
of the Company;
(b) such shares are entitled to a liquidation preference of
$1 per share plus an amount equal to accrued and unpaid
dividends on such share, which liquidation preference is
senior in priority to the Company's common stock, and, after
the holders of common stock have received $0.01 per share,
such shares of Series J are further entitled to receive an
amount equal to 100 times the amount per shares in excess of
that $0.01 received by the holders of the common stock;
(c) subject to certain specified restrictions, such shares
are convertible, at the holder's option, at any time, in
that number of shares of the Company's common stock equal to
(i) 100 shares of common stock, which amount is subject to
adjustment under certain specified circumstances;
(d) such shares are voting shares and holders thereof shall
be entitled to vote together with the holders of common
stock, voting as a single class, on all matters presented
for a vote of the holders of common stock, which each share
of Series J being entitled to 100 times the number of votes
to which a share of common stock is entitled; and
(e) the Series J (i) rank prior to the shares of common
stock to the extent specifically provided in the Certificate
of Designations, Powers, Rights and Preferences of the
Series J, and in all other respects, rank on parity with the
common stock, (ii) are on parity with the shares of Series A
Convertible Participating Preferred Stock of the Company and
(iii) are, and will be, junior to the shares of all other
series of preferred stock of the Company, other than series
which are expressly designated as ranking on a parity with,
or being junior to, the Series J.
Prior to the transaction, Japan Energy Corporation, and its
wholly-owned subsidiaries including Gould (the "Japan Energy
Group") beneficially owned, on a fully-diluted basis, 81.6%
of the Company's outstanding common stock. Upon completion
of this transaction, Japan Energy Group's beneficial
ownership, on a fully converted basis, increased to 82.9%.
The completion of these transactions has the following
effect on the Company's financial statements:
(i) shareholders' equity increased by $39,833,000 as
follows:
Reduction of debt $ 40,000
Less:
Par value of shares issued (4)
Reversal of accrued interest
on previous recapitalizations 283
Accrued interest on remaining Gould indebtedness
for the remaining term of the agreements (446)
Increase in additional paid-in capital $ 39,833
F. Liquidity
Based on current estimates of available cash flow,
management does not believe it will have sufficient cash to
make the mandatory payment on June 30, 1997, without
proceeds from the sale of assets or a refinancing or
restructuring of the Credit Agreement prior to such date.
Additionally, the Company does not have a committed source
of financing to meet expected requirements over the next
year. The Company has retained an investment banking firm
to assist in exploring strategic alternatives which include,
among other things, a business combination, sales of assets,
strategic investment in the Company or a refinancing of the
Credit Agreement. There can be no assurance that the
Company will be successful in its attempt to consummate one
of the strategic alternatives or a refinancing or
restructuring of the Credit Agreement. If the Company does
not make the required payment at maturity of the Credit
Agreement or is unable to obtain a committed source of
financing adequate to meet expected requirements, it may be
unable to continue its normal operations, except to the
extent permitted by the Japan Energy Group. Substantially
all of the Company's tangible and intangible assets are
pledged as collateral under the Credit Agreement.
Item 2
Management's Discussion and Analysis
of Financial Condition and Results of Operations
for the Three Months Ended March 30, 1997
Compared to the Three Months Ended March 31, 1996
The following is management's discussion and analysis of the
financial condition and the results of operations of Encore
Computer Corporation ("Encore" or the "Company") for the
three month period ended March 30, 1997 compared to the
three month period ended March 31, 1996. The Company's net
loss for three months ended March 30, 1997 was $20,023,000
compared to the net loss for the same period of 1996 of
$16,897,000. The increased losses are attributable to lower
revenues and gross margins as potential customers continue
to express concerns over the Company's financial condition.
On March 19, 1997, Gould as authorized by Japan Energy
Corporation, agreed to cancel $40,000,000 of indebtedness
pursuant to their loan agreement (the "Credit Agreement") in
exchange for the issuance to Gould of 400,000 shares of the
Company's Series I Convertible Preferred Stock ("Series I"),
as discussed in more detail in Note E of Notes to Condensed
Consolidated Financial Statements. The Company and Gould
also agreed to amend the Credit Agreement to (i) reduce the
maximum amount which can be borrowed by the Company from
$80,000,000 to $50,000,000, and (ii) provide that any
borrowings in excess of $41,915,869 (the principal amount
outstanding on March 19, 1997 after giving effect to the
exchange of indebtedness for shares of Series I) may be made
only at the discretion of Gould. On May 12, 1997, Gould
agreed to amend the Credit Agreement to increase the maximum
amount which can be borrowed by the Company from $50,000,000
to $55,000,000. As of May 13, 1997 the Company owed to
Gould $49,641,927 under the Credit Agreement, plus
$13,502,088 in accrued interest. All borrowings under the
Credit Agreement, plus accrued interest, are due and payable
on June 30, 1997.
Based on current estimates of available cash flow,
management does not believe it will have sufficient cash to
make the mandatory payment on June 30, 1997, without
proceeds from the sale of assets or a refinancing or
restructuring of the Credit Agreement prior to such date.
Additionally, the Company does not have a committed source
of financing to meet expected requirements over the next
year. The Company has retained an investment banking firm
to assist in exploring strategic alternatives which include,
among other things, a business combination, sales of assets,
strategic investment in the Company or a refinancing of the
Credit Agreement. There can be no assurance that the
Company will be successful in its attempt to consummate one
of the strategic alternatives or a refinancing or
restructuring of the Credit Agreement. If the Company does
not make the required payment at maturity of the Credit
Agreement or is unable to obtain a committed source of
financing adequate to meet expected requirements, it may be
unable to continue its normal operations, except to the
extent permitted by the Japan Energy Group. Substantially
all of the Company's tangible and intangible assets are
pledged as collateral under the Credit Agreement.
RESULTS OF OPERATIONS:
Total net sales for the three month period of 1997 decreased
29% to $8,333,000 from $11,714,000 for the three month
period of 1996. International net sales declined 21% to
$4,096,000. International sales for the three months ended
March 30, 1997 were 49% of total net sales as compared to
44% for the same period in 1996.
During the three month period ended March 30, 1997,
equipment sales decreased $2,388,000 or 36% from the same
period of 1996. In the first quarter of 1997 net Storage
Product sales were $1,233,000, including the reversal of
$954,000 associated with an international installation which
is expected to be returned, compared to $1,400,000 in the
first quarter of 1996. Sales of the Company's real-time
products declined by $2,221,000 to $2,950,000 in the three
month period ended March 30, 1997, from $5,171,000 in the
three month period ended March 31, 1996.
For the three month period ended March 30, 1997, service
sales declined $993,000, or 19% from the same period of
1996. Continued declining service revenues reflect the
effect on the service business of (i) the Company's
prolonged decline in equipment sales, (ii) the price
competitiveness of the marketplace, (iii) the completion of
long running government programs and subsequent
deinstallation of systems and (iv) longer warranty periods
for equipment sales required to compete in the storage
marketplace.
Cost of equipment sales for the three month period of 1997
increased from the three month comparable period of 1996 by
$1,297,000 or 22%, despite lower revenues. As a percentage
of net equipment sales, 1997 cost of equipment sales for the
three month period was 172% compared to 89% for the three
month period of 1996. These increases are the result of (i)
continued heavy discounting of Storage Products in an effort
to penetrate the marketplace, (ii) under utilization of
manufacturing capacity, (iii) higher warranty costs
associated with the Storage Product and (iv) the Company's
policy of not reversing cost of sales on returned equipment.
Cost of service sales for the three month period ended March
30, 1997 decreased from the comparable period of 1996 by
$692,000 or 14%. All service sales are derived from
installed real-time products and the cost structure within
the service department is highly variable due to the
utilization of service partners. While the real-time
service business continues to be profitable, service margins
were reduced for investments in various programs and
infrastructure necessary to support the Storage Product
line. For the three month period ended March 30, 1997, this
investment was $1,400,000. Therefore, cost of service sales
associated with real-time services was $2,869,000, resulting
in an adjusted gross margin of $1,281,000 or 31% of service
revenues.
Research and development costs for the three month period
ended March 30, 1997, decreased from the comparable period
of 1996 by $995,000 or 12% . The decrease in 1997 spending
is attributable to lower labor costs and reduced development
material costs. However, as a percentage of net sales,
research and development expenses were 87% for the three
month period ended March 30, 1997 compared to 71% for the
comparable period of 1996. The Company expects research and
development spending in the near term, to remain relatively
constant.
Selling, general and administrative expenses decreased by
$1,080,000 or 12% for the three month period of 1997 when
compared to 1996. The decrease is attributable to lower
labor costs in the administration functions and lower
commissions due to the decline in sales. As a percentage of
net sales, selling, general and administrative costs
continue to remain high, 92% for the three months ended
March 30, 1997 compared to 74% for the comparable period of
1996.
Interest expense for the three month period ended March 30,
1997 increased from 1996 levels by $709,000, reflecting the
Company's higher debt level during the first quarter of 1997
due to the timing and value of the various recapitalizations
occurring in both years.
Other expense for the three month period of 1997 increased
from 1996 by $523,000 due to higher foreign exchange losses.
LIQUIDITY AND CAPITAL RESOURCES:
During the past five years, the Company has incurred
significant operating losses and has been unable to generate
cash flows from operating activities. Cash used in
operating activities for the first quarter of 1997 amounted
to $9,044,000 compared to $14,356,000 for the same period in
1996.
During the three month period ended March 30, 1997, cash
used in operating activities decreased by $5,312,000 when
compared to the three month period ended March 31, 1996.
For the three month period ended March 30, 1997, the net
loss, as adjusted for non cash items, exceeded the net loss
for the comparable period of 1996 by $3,982,000. Accounts
receivable and inventories decreased $4,732,000 and
$1,796,000, respectively, in the first quarter of 1997,
while in 1996, the Company invested heavily in inventories
to improve Storage Product availability, increasing
inventory by $6,284,000. Accounts payable and accrued
liabilities increased $1,823,000 and $6,363,000 for the
first quarter of 1997 and 1996, respectively.
Expenditures for property and equipment for the three months
ended March 30, 1997 and March 31, 1996 were $725,000 and
$1,877,000, respectively. Spare parts required to support
customer installations accounted for 43% of total property
and equipment spending in the first quarter of 1997. As of
March 30, 1997, there were no material commitments for
capital expenditures.
Cash used in operating and investing activities during the
three month period of 1997 and 1996 was principally offset
by cash provided through financing activities of $10,839,000
and $15,287,000, respectively. The principal source of
financing has been through various agreements provided by
the Japan Energy Group. As discussed in Notes D and E of
Notes to Condensed Consolidated Financial Statements, on
March 19, 1997, the Company and Gould agreed to cancel
$40,000,000 of indebtedness owed to Gould under their loan
agreement (the "Credit Agreement") in exchange for the
issuance to Gould of 400,000 shares of the Company's Series
I Convertible Preferred Stock ("Series I") with a
liquidation preference of $40,000,000. In addition to the
exchange of indebtedness for shares of Series I, the Company
and Gould also agreed to amend the Credit Agreement to (i)
reduce the maximum amount which can be borrowed by the
Company from $80,000,000 to $50,000,000 and (ii) provide
that any borrowings in excess of $41,915,869 (the principal
amount outstanding on March 19, 1997 after giving effect to
the exchange of indebtedness for shares of Series I) may be
made only at the discretion of Gould. On May 12, 1997,
Gould agreed to amend the Credit Agreement to increase the
maximum amount which can be borrowed by the Company from
$50,000,000 to $55,000,000. As of May 13, 1997 the Company
owed to Gould $49,641,927 under the Credit Agreement, plus
$13,502,088 in accrued interest. All borrowings under the
Credit Agreement, plus accrued interest, are due and payable
on June 30, 1997.
Based on current estimates of available cash flow,
management does not believe it will have sufficient cash to
make the mandatory payment on June 30, 1997, without
proceeds from the sale of assets or a refinancing or
restructuring of the Credit Agreement prior to such date.
Additionally, the Company does not have a committed source
of financing to meet expected requirements over the next
year. The Company has retained an investment banking firm
to assist in exploring strategic alternatives which include,
among other things, a business combination, sales of assets,
strategic investment in the Company or a refinancing of the
Credit Agreement. There can be no assurance that the
Company will be successful in its attempt to consummate one
of the strategic alternatives or a refinancing or
restructuring of the Credit Agreement. If the Company does
not make the required payment at maturity of the Credit
Agreement or is unable to obtain a committed source of
financing adequate to meet expected requirements, it may be
unable to continue its normal operations, except to the
extent permitted by the Japan Energy Group. Substantially
all of the Company's tangible and intangible assets are
pledged as collateral under the Credit Agreement.
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K
Exhibit No. 11 - Statement re: computation of per
share earnings. See page 20.
Exhibit No. 27 - Financial Data Schedule. See page
21.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company
during the quarter ended March 30, 1997.
Encore Computer Corporation
Signatures
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned.
Encore Computer Corporation
KENNETH G. FISHER EDWARD J. BAKER
_________________ _______________
Date: May 19, 1997 Kenneth G. Fisher Edward J. Baker
Chairman of the Board Corporate Controller
and Chief Executive Officer Secretary
Chief Accounting Officer
ENCORE COMPUTER CORPORATION
Computation of Loss per Share Exhibit 11
(in thousands except per share data)
Three Months Ended
March 30, March 31,
Primary 1997 1996
Net Loss ($20,023) ($16,897)
Series B, D, E, F and G Preferred
Stock Dividends 0 (5,954)
Series B, D, E, F, G and H Accumulated
Preferred Stock Dividends (6,860) 0
Net loss attributable to
common shareholders ($26,883) ($22,851)
Weighted average common
shares outstanding 37,276 36,350
Series A assumed converted 7,364 7,364
Weighted avg shares outstand 44,640 43,714
Loss per common share ($0.60) ($0.52)
Assuming Full Dilution
Net loss ($20,023) ($16,897)
Wghtd avg common shares outstand 37,276 36,350
Series A assumed converted 7,364 7,364
Series B assumed converted 23,392 21,242
Series D assumed converted 35,794 32,503
Series E assumed converted 36,587 33,223
Series F assumed converted 17,120 12,437
Series G assumed converted 18,370 6,388
Series H assumed converted 11,235 0
Series I assumed converted 1,659 0
Exercise of options reduced by the number
of shares purchased
with proceeds 2,786 3,709
Weighted avg shares outstand 191,583 153,216
Net loss per share ($0.10) ($0.11)
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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Exhibit No. 27
ENCORE COMPUTER CORPORATION
Financial Data Schedule
(in thousands except per share data)
For the three months ended March 30, 1997
Cash and cash items 5,006
Marketable securities 0
Notes and accounts receivable-trade 10,997
Allowances for doubtful accounts -759
Inventory 12,100
Total current assets 28,134
Property, plant and equipment 82,002
Accumulated depreciation -49,823
Total assets 61,866
Total current liabilities 74,334
Bonds, mortgages and similar debt 612
Preferred stock no mandatory redemption 49
Common stock 373
Other shrhldrs' eq (Cap'l deficiency) -14,590
Total liabilities & equity 61,866
Sales of tangible products 4,183
Total revenues 8,333
Cost of tangible goods sold 7,176
Total costs applicable to revenues 11,445
Other costs and expenses 663
Provision for doubtful accounts and notes 159
Interest and amortization of debt discount 1,370
Loss before taxes -20,052
Income tax expense -29
Net loss -20,023
Earnings per share-primary -0.60
Earnings per share-fully diluted -0.10
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